In 1988, Barbara Ann Vargo went to work for Lincoln Brass Works Inc. in Detroit as an at-will employee. In 1993, Lincoln moved its sales office from Detroit to Nashville. Vargo moved and was an office manager and administrative assistant.
In 1997, Lincoln terminated three employees at the Nashville plant and gave them severance pay. In July 1998, Lincoln terminated another 21 employees, including Vargo, in a second reduction in force. Because of a cash crunch, none of the 21 received severance pay.
Vargo sued Lincoln asserting she was entitled to severance pay under the company's severance policy. The trial court awarded Vargo $15,262 in severance pay and interest and Lincoln appealed to the Court of Appeals of Tennessee. The court examined the company's 1996 severance policy, which stated that it was "designed to provide a period of income after termination to eligible employees." Under the policy "severance payments will be paid at the rate of one-half month's salary for each full year of employment, as of the termination date, with a maximum payment of six months (deductions made as required by law)." The policy also stated that Lincoln's management had "the sole discretion to determine eligibility for severance pay."
According to the appellate court, the phrase "severance payments will be paid" embodies an enforceable obligation to pay severance benefits to eligible employees. The court stated, "The discretion that Lincoln Brass Works retained in the Severance Policy did not involve determining whether or not to pay severance pay, but rather involved determining whether a particular employee was eligible to receive severance pay." Under the policy, an employee was not eligible for severance if he or she voluntarily terminated employment or was discharged for cause. Noting that Vargo had not quit or been fired for cause, the court ruled she "could reasonably rely on the company's promise of severance pay," and upheld the trial court's award in her favor.